Current Economic and Security Situation in Central Asia and Its Impacts on the Shanghai Cooperation Organization

Pan Guang

Current Economic and Security Situation in Central Asia and Its Impacts on the Shanghai Cooperation Organization

Pan Guang

Stepping out of the crisis, Central Asia is faced with both challenges and opportunities for cooperation in the areas of finance and energy. Meanwhile, suffering from the double ripple effects of both the terrorist violent activities in Afghanistan and Pakistan and the unrest in the Middle East, the security situation in Central Asia is worsening again. The new development of the situation in Central Asia has a lot to do with the Shanghai Cooperation Organization (SCO), and has brought new issues and new opportunities for the SCO.

I. Economic Recovery of Central Asia in the Post-Crisis Period and the Role of the SCO

The international financial crisis has severely attacked Central Asia, chopping the average economic growth of the countries in the region from 6.6% in 2008 down to 1.5% in 2009. The Central Asian countries have taken a series of countermeasures based on their own national situations to fight the financial crisis. In November 2008, the Kazakhstani government approved the National Anti-Crisis Plan, followed by a detailed implementation program on the Plan at the beginning of 2010, to pool KZT2.2 trillion (about $18 billion at the time) to resist the financial crisis. Besides, the state has been backing up the real economy by means of lowering tax and registration fees of small enterprises. As a result of the various comprehensive measures, the trend of economic decline of Kazakhstan has been slowed with the industrial and agricultural indicators turning robust, investment expanded, fiscal revenue increased, the frozen real asset market thawing, and inflation pressure alleviated. The Kyrgyz government has taken a batch of measures, including consolidating the banking system, enhancing surveillance and financing capacity of the Central Bank, improving the business environment for enterprises, promoting foreign trade, stimulating domestic consumption, stabilizing electricity supply to mitigate power shortage, and increasing investment in agriculture to ensure food supply, etc. The Tajikistani government has chopped the public expenditure by a big margin, decreased the commercial loan interest from 18% to 14%, and guaranteed the fiscal allocations for agriculture to entrench the cotton industry, so as to reduce the impact of the financial crisis to a minimum level. The Uzbek government has adopted a series of measures timely, including reducing the enterprise taxes, pouring capital into the state-owned commercial banks, supporting the real economy and the exporting enterprises, raising the threshold of registration capital for stock companies, and forcing up the export prices of the natural gas, to mitigate the impacts of the financial crisis. The Turkmen government has stuck to the diversification policy in energy export and has successfully maintained the stable export income.

The international financial crisis has brought Central Asia to an important understanding. That is, in today’s world of rapid economic globalization and regionalization, it is imperative to push forward the multilateral mechanisms for economic cooperation such as the SCO and the financial cooperation between member countries is assuming increasing urgency. According to observers, in order to realize economic recovery at an earlier date, the member countries of the SCO have worked together and adopted a number of joint countermeasures, which has created initial effects. In order to surmount the financial bottlenecks for the multilateral cooperation projects, China has provided the SCO member countries successively with concessional loans totaling over $12 billion and offered special loans to Russia and Kazakhstan. At the same time, the multi-layered framework for financial cooperation in the SCO region has taken shape institutionally, namely, the multilateral financial cooperation at the macro-level, the bilateral financial cooperation at the mezzo-level, and the cooperation between institutions at the micro-level. As advocated by some scholars, the SCO should promote the financial cooperation at both the strategic and the tactical levels. Strategically, Russia should identify itself with the financial cooperation and dispel its worries about China step by step. Tactically, some countermeasures, such as the anti-crisis funds and the currency swap, should be regularized with a view to establishing a SCO development bank. Judging from the current situation, the institutional building of the SCO financial cooperation, albeit with some progress, is not adequate to meet the demands of financial service. There are still some constraints for the deepening of regional financial cooperation. Firstly, Russia only shows lukewarm enthusiasm; and secondly, the member countries are at unbalanced levels of financial development. Countries like Tajikistan, Kyrgyzstan, and Uzbekistan are small in their capital markets and their banking sectors do not live up to standards yet.

Central Asia boasts rich oil and natural gas reserves. The member countries of the SCO, composing energy exporters, energy importers, and energy transmission carriers, represent a complete complementary system of energy supply and demand. Therefore, energy cooperation constitutes definitely the top priority of the SCO economic cooperation and trade. At present, the energy cooperation shows the following features: Firstly, the cooperation is ever deepening in various forms, not only including the oil cooperation, but also involving cooperation in areas of nuclear energy, electricity, and hydropower, etc. Secondly, cooperation is unfolded both bilaterally and multilaterally with bilateral cooperation as the mainstay. Russia is exporting oil to China through the Kazakhstan-China pipeline, while the opening of the Turkmenistan-Uzbekistan-Kazakhstan-China pipeline marks a significant improvement of the multilateral cooperation. Thirdly, the development of the energy cooperation is relatively unbalanced with the cooperation in some areas lagging behind. Fourthly, complementary cooperation coexists with competition. Fifthly, the institutional building for energy cooperation is relatively laggard. Putin, the then president of Russia, proposed to establish the energy club in the SCO framework in 2006. However, a clear plan is yet to be developed. There are different opinions on the energy club idea. Some experts are worried that the disproportionate energy cooperation is not good to the balanced and sustainable development of the economic cooperation of the SCO, and that, as energy is nonrenewable resource, excessive exploration will endanger the energy security of the member countries.

Russia is extremely active in pushing the economic integration in the scope of the former Soviet Union. Besides the Eurasia Economic Community and Customs Union, Russia is also striving to promote a free trade area among the Commonwealth of the Independent States (CIS), planning to establish a unified economic space, energy market and financial space starting from 2012, and introduce a unified currency and realize free flow of goods and capital. It is likely that this trend will bring about negative impacts on the SCO economic cooperation, especially the trade between China and other SCO member countries. For instance, the recently established Customs Union between Russia, Belarus and Kazakhstan is bound to hamper the entrance of the Chinese commodities into the Central Asian region. Apart from the rise of average tariff in some countries, the Customs Union will set up new barriers for the Chinese products in terms of customs procedures and quarantine inspection standards. However, the Customs Union is not totally negative to China and the SCO. There are some positive effects. In the aspect of export subsidies, it will give more impetus to Russia to export highand new-tech products and agricultural products together; as the Customs Union will implement non-discriminatory railway transit starting from 2013, the transportation cost will be reduced to facilitate the entrance of the Chinese products into the member countries of the Customs Union; China can also enhance investment in the participating countries of the Customs Union to circumvent the tariff barriers. Up to date, China has accumulated some successful experience in dealing with the European Union countries in economic cooperation and trade, for her reference in developing economic cooperation and trade with the participating countries in the above-mentioned Customs Union.

II. Impacts of Re-deteriorated Security Situation in Central Asia on the SCO

Since the beginning of 2011, the increasing terrorist violent activities in Afghanistan and Pakistan, the uncertainty of the withdrawal from Afghanistan of the armed forces of the United States and the North Atlantic Treaty Organization (NATO), and the ripple effects of the unrest in the Middle East have aggravated the security situation of Central Asia again in the following aspects:

1. The intensified violent conflicts in Afghanistan and Pakistan have exerted strong assaults on the Central Asia region.

Since the beginning of the year, especially after Osama bin Laden was killed, the terrorist violent activities in Afghanistan and Pakistan have escalated dramatically while the United States and the NATO also strengthened their attacks. The terrorists tend to move back to Central Asia and the probability of Taliban expanding its sphere toward the adjacent Central Asian countries is increasing. Evidence shows that when riots breaking out in Kyrgyzstan, the terrorist organizations such as Al Qaeda were all involved in instigation. The Central Asian countries bordering with Afghanistan carry on slack border control. For instance, Afghanistan and Kazakhstan share a border of over 1,300 kilometers which is porous, leaving terrorist forces with numerous loopholes. At the same time, as the relations between the United States and Pakistan deteriorated, the north corridor for transmitting materials to Afghanistan via Russia and Uzbekistan began to play a greater role. The freight transported via the north corridor accounted for 40% of the total freight to Afghanistan, and will grow to 75% in future. Therefore, the possibility that Taliban attacks the north corridor is increasing, a hidden trouble for Central Asia and the SCO.

2. The ever expanding ripple effects created by the Middle East turbulences put the stability of the Central Asian countries to severe test.

Comparing Central Asia with the Middle East, some scholars hold that the situation in Central Asia is somehow similar to the turbulent Middle East in terms of autocracy, corruption, poverty, inflation, and unemployment, at different degrees, though. According to them, the main unstable factors in these countries include complicated and mingled contradictions between elite, factions, and tribes; excessively long tenure of the leadership; hyperinflation as experienced by Uzbekistan and Turkmenistan last year whose price indices increased by 15% and 12% respectively; prolonged high unemployment rate, which runs as high as 80% in the Fergana Valley; and corruption and rent-seeking. All these similar factors are so worrisome that people are afraid that Central Asia may follow the Middle East haunted by unrests. Still some other scholars indicate that the most worrisome is the spread of the Middle East extremist currents in Central Asia. Over 70 years of secular education under the regime of the Soviet Union left little market for the Islamic extremism in the Central Asia countries. However, under the influences of the Afghan conflicts and the Middle East turbulences, the religious extremism has returned to Central Asia recently, impinging on secularism. Under the surface of beard and veil wearing and name changing is the activism of the extremist organizations. Recently, Roza Otunbayeva, Kyrgyz President, has warned that extremists are plotting terrorist activities in Kyrgyzstan. However, the riots should not be inevitable in Central Asia if the relevant countries would carry out earnest reforms, realize harmonious coexistence between different ethnic groups and religions, promote economic and cultural development, create more job opportunities, and give more play to the SCO and other organizations in safeguarding stability.

3. Non-traditional security threats are rising and the Central Asian countries may run into conflicts due to interest disputes.

Since the second half of 2008 when the financial and economic crisis spread to Central Asia, the disputes between Central Asian countries became acute due to historical feud, water resource allocation, trade disputes, illegal labor, and debts, etc. The Uzbekistan’s relations with Tajikistan, Kyrgyzstan, and even with Kazakhstan were especially strained due to the water resource allocation problem left over by the Soviet Union period. The tension between Uzbekistan downstream and Tajikistan upstream was worsened during 2010, even to the verge of war when Uzbekistan detained the transit goods of Tajikistan. These serious developments directly challenged the solidarity and cooperation between the SCO members. At the same time, the Central Asian countries still have disputes on border ethnic issues and territorial issues. The swelling nationalism may lead to conflicts between ethnic groups along the border. The vicious friction between the Uzbek nationality and the Kyrgyz nationality broke out in June 2010 as a dangerous precedent. The after-effects of the accident have not been cleared up yet. The former director of Department of Internal Affairs, Osh Province, Kyrgyzstan, has indicated that the next round of attacks will occur at any time.

4. Transnational crimes severely overshadow the social stability of Central Asia.

Recently, the transnational crimes such as drug making and trafficking, arms smuggling, and illegal immigration, etc., have been aggravated in Central Asia, imposing grim threats on the regional security. Since 2011, drugs smuggled to Central Asia from Afghanistan have been notably increased to the universal detriment of the Central Asian countries, Russia, and even China. Drug smuggling is closely connected with terrorist activities, as the terrorist groups tend to raise funds through organizing and supporting drug making and trafficking and use the funds for terrorist activities. Drug smuggling in turn exacerbates corruption in the Central Asian countries. Some drug trafficking groups have formed up interest chains with the corrupted governmental officials to smuggle drugs under the wings of law executive bodies. At the same time, the widespread of drugs brings about a series of social problems to the Central Asian countries, such as increase of drug addicts and AIDS infection.

III. Ways to Further the Economic and Security Cooperation in the SCO

The new situation and new problems in Central Asia have put forward a critical issue for the SCO. That is how to drive the situation in the direction of furthering the economic and security cooperation in the organization. The key lies in surmounting the obstacles and finding breakthroughs.

The main obstacles for furthering the SCO economic and security cooperation go as follows:

1. Fundamental obstacles exist for economic cooperation.

The member economies are at different levels of development with great gaps in industrial structure, economic scale, trading system, capital market, and institutional building. Some countries, still wanting sound financial system, do not have effective surveillance models, diversified financing models, and ample financing channels. In some countries, the low levels of information, advisory, and research services are not compatible with the cooperation process so much so that the economic and financial cooperation is affected in terms of convenience and timeliness. Still in some other countries, the logistics infrastructure building such as ports, roads, customs clearance facilities, storage, and cargo agency are lagging far behind the speed of regional trade and investment, leading to low transport capacity and passage efficiency.

2. Misunderstanding and suspicion remain the psychological obstacle for furthering cooperation.

Some people in Central Asia are blindly spreading “China threat” and criticizing China for implementing “economic colonialism”, worrying that China would control Central Asia by economic means. Some people in Russia are suspicious of the rise of China’s influence in Central Asia and remain halfhearted to the SCO economic cooperation. On the other hand, China is also complaining about the trade barriers, investment environment, and financial services in Russia and the Central Asian countries. Similar misunderstandings and suspicions exist between Russia and the Central Asian countries. These phenomena have exerted negative impacts on the various cooperation programs under the framework of the SCO.

3. The disagreement on the issue of admission of new members remains an institutional obstacle.

As an open regional organization, expansion of membership is necessary to enlarge the space of cooperation and improve its international influence. However, considerable controversy exists between members in the concrete way of membership expansion. Some hold that the SCO should speed up membership expansion to have more countries join the organization. Another group recognizes the necessity of membership expansion, yet worries about the development crisis as experienced by the European Union if the expansion paces are too fast. They hold that the key is to expand the membership step by step in accordance with procedures so that new members should be able to shoulder responsibilities and obligations for the benefit of stable and suitable development of the organization. The disagreement has dampened the cooperation between the SCO members, observers, and other related countries.

4. Inadequate cohesiveness inside the organization remains a structural obstacle.

The SCO has long been blamed for its inadequate cohesiveness. At present, confronted with the contradictions and conflicts between the member countries, such as the water resource conflict, the SCO can hardly find any role to play. The SCO should make attempts to mediate such kinds of contradictions and conflicts in the course of its development in future. At the same time, for the sake of harmonious interactions between the member countries, the SCO should not only promote cooperation at the official level, but enhance the interactions and exchanges at the level of civil society, and strengthen the exchanges and complementation between different civilizations in particular, to promote the “exchange of hearts and cultural dialogues between the peoples of the SCO member countries.” After ten years practice, the SCO has made remarkable achievements in this respect and there is great potential to tap for further development.

Suitable breakthroughs must be found for further economic and security cooperation in the SCO. The following measures are likely to be helpful.

Firstly, energy cooperation should be further enhanced. The pipelines from Central Asia and Russia to China have been successively launched and Russia has transmitted oil to China via the Central Asia-China pipeline. All these developments indicate that a new opportunity for enhancing energy cooperation in the SCO has appeared. The SCO should grasp the opportunity to turn more bilateral cooperation programs into multilateral programs and extend the cooperation to the development of strategic rare minerals and the infrastructure building along the key transportation routes, with special attention paid to the security of energy pipelines. As an advantageous cooperation area for the SCO, energy cooperation requires tremendous financial input. With the current huge shortage of capital for energy development, member countries with large foreign reserves such as China could invest in energy projects in forms of construction in exchange for resources, credit for resources, and investment for ownership.

Secondly, the trade and investment facilitation process should be accelerated. It is advisable that the SCO consider to set up an agency similar to “Trade Development Division” to study the ways to settle the relevant problems of trade and investment facilitation between member countries, for instance, action plan on implementation of the program of multilateral trade and economic cooperation, coordinated actions to defuse the constraints of trade and economic cooperation, visa at the port of entry to facilitate traveling among member countries and observer countries, and navigation and air traffic facilitation, etc. Trade and investment facilitation should be further promoted to lay a foundation for the final realization of the SCO free trade area.

Thirdly, security cooperation should be further promoted in three areas. The internal crisis of the Kyrgyzstan, the ripple effect of the Afghan conflicts, and the spread of the recent unrest in the Middle East have all intensified the security situation in Central Asia, so much so that the leadership of the Central Asian countries come to the more acute appreciation of the significance of stability. For the time being, the SCO is the most able multilateral mechanism to maintain stability in Central Asia, especially in solving border issues, striking the three forces of terrorism, separatism and extremism, and curbing transnational crimes. Therefore, the SCO members are more eager and resolute to enhance security and counterterrorism cooperation in the framework of the Organization. Breakthroughs are attainable for the SCO security cooperation in the following three aspects where more efforts should be made to enhance counterterrorism cooperation with comprehensive management to deal with both the symptoms and the root causes; promote the nuclearfree zone plan and prevent the spread of weapons of mass destruction in Central Asia; and combat the evil crimes of drug making and trafficking and eliminate the drug sources threatening the SCO members.

Fourthly, financial cooperation should be promoted. The launch of a series of financial cooperation programs between China, Central Asia and Russia indicates that the new opportunity has emerged for enhanced financial cooperation in the SCO. In order to grasp this opportunity, it is presently desirable to touch the following points. i) the emergency programs for combating the financial crisis should be turned into regular cooperation programs and mechanisms, and a special account of the SCO should be opened with a view to establishing the SCO Bank; ii) the SCO members with ample financial strengths such as Russia and China may consider setting up a “Joint Development Bank”, and develop it into“the SCO Joint Development Bank”, under which an “anticrisis fund” and a “development fund” will be set up to help member countries to overcome the economic predicament and development bottlenecks; iii) the trade settlement mechanism of the SCO should be reformed to construct a new trade settlement mechanism with bilateral currencies, enhance currency policy coordination between the member countries, build regional trade settlement and payment system, and strengthen the cooperation between the sovereign wealth funds of the member countries; iv) financial leasing should be promoted to meet huge demand for capital to fund infrastructure refurbishment in Central Asia and help the creditors mitigate risks; and v) production chain finance should be introduced in the SCO framework to ease the financing problems of small and medium enterprises.

Fifthly, the SCO programs should be oriented to people’s well-being. The SCO should actively carry out programs for people’s well-being so that the development cooperation in the SCO will be more closely connected with people’s well-being of member countries, and the citizens of the member countries may harvest concrete benefits. Among others, such programs may include poverty alleviation projects in underdeveloped areas, re-employment training projects for the Fergana Valley where the unemployment rate runs 80%, hope schools for the school dropouts, and environmental protection projects. The agricultural cooperation launched and promoted on the basis of the consensus of the SCO Agricultural Ministerial Meeting can also be combined with the programs for people’s wellbeing.

Sixthly, the SCO should play a greater role in the process of social stabilization and economic reconstruction of Afghanistan. The SCO should give a bigger play to the SCOAfghanistan Joint Liaison Group to enhance the coordination and cooperation with the Afghanistan government, support the endeavors of national reconciliation, and conduct communication and dialogues with various forces in Afghanistan. The SCO should also enhance communication and coordination with the United States and NATO, to be informed of the steps of their withdrawal from Afghanistan and to engage them through cooperation in counterterrorism, combating drugs, logistical transportation, and training, etc. The SCO should promote coordination between member countries in their trade with Afghanistan and assistance for Afghanistan to avoid unnecessary contradictions and internal frictions. When conditions are ripe, some programs can be implemented in the name of the SCO.

Finally, the SCO should cooperate with the United Nations to safeguard stability and establish a cooperative emergency mechanism. From the perspective of the general security of Central Asia, as a non-military alliance, the SCO finds it difficult to establish a joint rapid response force. If a SCO member experienced deterioration of internal unrest, while no other members would like to be involved unilaterally, in this case, the intervention of the UN could be a viable alternative. According to the joint declaration by the secretariats of the UN and SCO, the UN also needs the support and assistance of the SCO in its actions in Central Asia. Therefore, the SCO could establish a cooperative emergency mechanism with the UN on the basis of the joint declaration. In case of contingencies, the UN could authorize SCO members to undertake the emergency missions in the scope of the Organization. Such missions will be both legitimate under the auspices of the UN and competent to mitigate the regional tensions instantly to guarantee the security of Central Asia.

Pan Guang is Director of Center of Shanghai Cooperation Organization Studies, Shanghai Academy of Social Sciences.